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March 26,2007

Nmcy C. Morris, Secretary Jennifer J. Johnson, Secretary Securities and Exchange Codss ion Board of Governors ofthe 100 F Street, N.E. Federal Reserve System Washhgtton, DC 20549- 1090 2ofhStreet & Cmtitution Ave., M.W. R d & ~ m m i e n t ~ @ , ~ e ~ . ~ ~ v Washington, DC 20551

Regs.comments@federalreme.pov

Re: Definitions of Terms and Exemptions Relating to the "Broker" &c;eptiom for Banks; File EZo, S7-22-06; Rocket NO,R-1274; Federal Rerristes 77522 (Dm. 26.20061

Dear Ms. Morris and Ms, J o h n :

The PNC Firmucia1 Services Group, Inc, ("'FNC"), Pittsburgh, Pennsylvania, appreciates the oppo&ty to camment on the proposed Regulation R jointly issued by the Securities and Exchange Commission (Commission) md the Bawd of Govemrs of the Federal Reserve System (Board), (hereinaftercollectively r e f e d to as "Agencies"),to imp1emmt certain exceptions for banks h m the dehitim of tEre tern '"brokw"under Section 3@)(4) of tlye Securities Exchange Act of 1934 ("'ExchangeAct"), as amendedby the Grm-hach-Bliley Act (''GLBA'?"),

PNC is oneoftbe largest diversifiedhmcial services companies i-n the United States, with $1 01-9billion in assets as of Decwlber 31,2006. PNC engages in retail baking, institutional banking, asset.management and global fundprocessing services. Its principal subsidiarybank, PNC Bank, National Association rFNC B&), Pitt&ur& Pemsylvania, has branches in the District of Columbia, Florida, Indiana, Kentucky, Maryland, New Jersey, Ohio, Pennsylvania and Virginia. PNC &a bas 12 other subsidiarybanks, which are located, md have branches in,Mqland, Virginia andDelaware.

PNC also has several broker-dealer affiliates, includingJ.J.B. Hillbud, W.L. Lyons, Inc., which is a member of the NationalAssociation of SecuritiesM e r s ('WASD") aad the New York Stock Exchange; and PNC hvestments, LLC,PNG Capital Markets,Inc., and Mercantile Brokerage Services, kc. , which an= members of the NASD. PNC abo offers b e s t m e n t management, custody and fiduciary (including trust) services tbn,ugh departments sfPNC Bank, National &sociation, PNC BaaEr, Delaware, Mercantile-Safe Deposit and Tmst Company, Baltimore, MqIand, and Idamtile Peninsula Bank, Selbyille, Delaware, which are regularly e x m i n dby bank examiners fir oomplimcewith,fiduciaryprinciples mdstamhds*

The PNC FinancialServices Group

One PNC Plaza 247 F i hAvenue Pittsburgh Pennsyl~nia15222 2707

Nancy C, Moms Jennifer J. J o h m March26,21107 Page 2

As you well how, the trip h m Regulation B to Regulation R has not b m without its pitfiills, andwe appreciate thehard work by the leadership and staff at both Agencies in formu2athg and issuing thb new proposal. Olar ofighaI c a m a t letter on Regulation B focused on our view that the mgplation did not reflect Congressional intent and would restrict h e ability of bd&g organizations to contiflue activities in which t h y had engaged without notable problems fm years, By contrast, the cment proposedregulations generally incorporate the intent ofCongress, and the come& address particular issues raised by the proposed regulations. Wejoin the other csmmentem in cummending the Agencies on this much impmved pfoposal.

PNC participated active1y in theformulationsf the conzmmt submitted by the American Bankers Association ("ABA") and its affiliate the ABA SecuritiesAssociation C'ABASA'"), and strmglyendarses the ABAJABASA commentletter, Rather than repeat all of the: recomendatiionsset forth in rhat letter, we are focusingon tbase issues that are af particular concern to PNC.

PRELIMINARY MATTERS

The Need for Lena1 Certainty Remuding Dual Bank Broker-Dealer Emnlavees

We join in the request of the ABAIABASA to resolve the issues of dual bank broker-dealer employeesand their reguest fir a clarificationoftheapplicabilityornot ofthe NASD's Rule 3040.

Applicabilitv of Multipie GLBA Exceptions

We request codinnation ofthe informal advicegivenpreviously by the staff of the A ~ c i e sthat the statutory exceptionsandthe proposed exemptionsinRegulation R are not mutually exclusive,and that activitiesthat are excepted or exempted under one provisionmay also be exceptedor exempted under another provision of theExchange Act, GLBA or Regulation R and that a bank may choose:with which af the applicable excepEions or exemptions i t will camply far specificactivities.

Future RewI.attorvAction

We join the ABA/ABASA in supporting colntinuedjoint rulemakingand the issuance of joint guidance by the G o e s i o n and the Board and codtation with the other bank regulators andwe request that the Board and the Commissionreachsome mmonunderstanding thatthey will ~;msulteach other in corndon with the institution ofany enfumment actions, including administrative cease and desist ardersJinvolving GLBA andrelated regulatoryissues, particulmIy when such action may involve new intapretatlions.'

See theABA/ABASA letter for a discussionofDunbarn T m ~ ~ See alsoywwwscc~gov/ t i t igat ion/~Y 2006J33-8740.pdf.

DISCUSSION OF REGULATION R

I. NETWOFWING EXCEPTION

A, Referral Fees

GLBA provides &at unregisteredbank employees may receive compensation fur the referral ofcustomers to broker-dealer firms if the compensation is "'anominal one-the cashf i ofa k e ddollar am~untand -the payment ofthe fee is not contingent onwhe#er the referral resultsin a Prokerage] trwacticm" Proposed Rule; 700 dtemativelydekes the statutory term "nominal one-he cash Ske of a fixed ddmrtm~mt,'"in terms of either multiples of base hourly wages or fractions of annual base salaries for the referring employee" job family, twice the employee's actual base hourly wage, or $25. Moreover, the proposal provides that the flat $25 referral fee could be adjusted for idation,

However, personnel such as mortgagebrokers, syndicated lenders, private bankers and trust salespersuns may receive relatively law base salaries together with high contingent compensation. Therefore, we request k t thepropod be revised to peperrnit another alternative measure of"'nominalone-time cash fee"based on totid hotmly or annual cornpendon for the r ~ k r b gemployee, so long as &at podon of fhe individua13scompensation that is based on securities trnnsaetion ~eferrdsis not included in total hourly or annual compensation. Under this formulation,bank employees could be paid a nlnminal refem1 fee that is twice their total hourly wage or 111000'~of their total annual compensation consisting oftheir base salary and noo-securities contingent compensation paid

The def*mitionof'hfenal" provides that a bank employee must direct a bank customer to the broker-dealer partner. We would suggest that referral also encompasspotential customers. It is not mcomman for apotential customer seeking financial services to approach thebank. After disoetaing the particular needs of the potential customer, the bank employee may refer the potential customer to its broker-dealerpartner. The bank employee should be compensated for that referral despite the factthat the party referred was not a bank customer.

B. B o a Plans

While we continue tomaintain thatCoqgrw, in enading thenetworkingexception ia GLBA, intended only to prohibit thepayment of traditional brokerage codssions, not bonuses, to bank employees, we are pleasedthat the Agencies havedefined the term "incentive compensation"in such a manner that it should not restrict tmditiod bwus plans. SpeeificaIly, proposed Rule 700@)(1) would permit banus p h s thaE arepaid on a discretionarybasis and are basedonmultiple f&rs and variables that include significant fmtm and variables that arc not related to securities tramactions at the brokerdealer, and do not include securities refkrdsas a factar or variable ksettingthe employee's compew&ion. Consequently,balanced, discretionary bonus plans that measure therevenue generatedby,or the profitabilityof, a total customer relatiomhip would satisfy he Rule's requirementsbecause the plan would include significant

Nancy C . Morris Jennifer J. Johnson Mmh 26,2007 Page4

factors and variables that are not relatedto securitiestmmetions. This would be true despite the fact that the bonus plan would include significant factors and variables that are securitiesrelated, such as revenues derived fnomsecuritiesunderwritingand brokerage servicesprovidedby the broker-dealer that may have been initially generated by a bank employee r e f e d .

Proposed Rule 700@)(Z) makes clear that bonus plans may alsotake into account the financial p r f o m c e of the bank, bank holding company, abank h~ldingcompany affiliate or uperalingunit, a,under certain cit.Ewstances, a broker-ddw. We mwurage theAgencies to allowbonuses to be paid to individuals based on the financial perf~manceof a branch, division, or gwgraphie or operational unit of a broker-dealer. Non-bank afEliated brokerage h sdo so, andwe see no reason why broker-denle~affiliated with banks shouldnot have the same flexibility to share operatingunit profits with theiremployees.

C. Institutional Referral Exemption

Proposed Rule 701 wodd allow banks that meet all the other eonditi~nsofthe networkingexceptionto pay r e f d fees that need not be nomind in amount to bank employees fat referring high net worth or institutional customersto a broker-dealer. These refemal fees also may be metingent on the consummationofa sale. However, the praposed rule itself is very proscriptive and burdensome.

(I) Hi& Net W d andInstitutionalCustomerDefinitions

We believe that the proposed financial tests for high net worth and institutional customers are unnecessarily high and make an unnecessarydistin~tionbetween natud persons and legal entities. For exampte, for thepurpose of determiningwhich referredpersons are capable of understanding thearrangementsinvalved in a coapem~tdreferral to a broker-dealer, we believe that investor protection would be senred by relying upon the definition of"'a~credited investor"foundin Rule 501 ofRegulationD promulgatgdunder the SecuritiesAct of 1933, as amended Among other things, use of the '"accreditedinvest& definition would accord traditional treatment to spouses withjointly ownedassets, rather than limiting each spouse to countingd y 50% ofjointlyowned assets, andwould not q u i r e that an inter vivas or "living trust"be treatedin the. same manner as abusiness coqmratian when, we would submit, it should be qualified an the basis ofthie settler's net wofi.

(2) Other P r ~ ~ e d dRequirements

It is our understanding thatbaak employee r e f d of current andprospective customers enmutered in tbe ordinary course ofan employeeperfofmine;his or her assigned duties, includeis the pdrnmm ofthose duties beyond the four w a s ofthe banking institutian, such as at civic, sporting and social fimcti~m,Suchreferrals tbat satisfiedthe other con6tiom of proposed Rule 701 would qualifq.for the papent ofenhanced fees,

Naney C.Morris JeMiTer Y Jobnsan March 26,2007 Page 5

Proposed Rule 701(a>@)rnmdaEes that a written agreementbetween thebank and the brokm-dealerprovide, among things, that the bank the brokerdealer determine that the referringbank employee isnot subject to;statutorydisqualificationunder the Exchange Act. We donut think that both entitiesneedin- the time and expense to p e d m this analysis. B w w e of the technical amplexities associa&d with determining whether a pemn is sBMori1y disqualified, it would be mofe appropriate far the mpomibilityfor making this determinationto be negotiated between fbe bmker-dealerand the bank accordingto which entity is best suited to p.eI.formthe analysis. Similarly,we believe that the bdnk and the broker-dealer may determine who would qualifythe customer and when; provided that the qualification took place no later than the time the referral feeuras paid to the bank employee. A bmkmdesnlerp e r f o d g its ' b o w y mcustom~f'and, if applicable under self-regulatoryrules, suitability,responsibilities would be able to determine that the customer is qualified as a high net worth investorat the time the Zrmker-ddereffkcts the securities hzuwaction on the customer's behalfbut befbre any ref& fee is paid to the banIr employee.

VVe stronglyobject to the requirement that thebroker-dder mustp d ~ ~ l la suitability d y s i s regarding the securities transaction at issue. SuitabilitymsTyses should only be required in accordancewith the d e s ofthe self-regulatory organizations (SROs) and those rules do not remepwfommce of suitability analyseson unsoli~itedtran5acti:om. Yet, this proposal would m i r e the broker-dealerto dojust tbL

2. TRUST AND FIDUCIARY EXCEPTI0N

Under GLBA, a bank can efict securities transnctionsin cannection with providing trust or fiduciary services and remain exempt fiom registrationas a broker as lung as four basic conditionsare sati&ed. First, the bank cannotpublicly solicitbrokeragebusiness, other than by advertising that it effects traawctiomin securities aspart of its overall advertising of its general trust business. Second, the bank's compensationfor e1Ffectitgtransactions in securities must consist chieflyof an administrationorannual fee;apercentage ofassetsunder management; a flat or cappedper orderprocessing fee that does not exceed tire cost ofexecuthg the securities transadanfar trust orfiduciaxycustomers, ox a combination ofsuch fees. Third, the bank would have to direct all trades of publicly traded domestic securities to a registeredbroker-dealer. And four& the bank must effect the bansactions ina department &at is regularly examinedby bank examinersfor compliance witb fiduciary principles and stanch&,

The purpose ~fthis exception is to continue to allow banks to engage in the types oftrust andfiduciary activities they have engagedin for many years, even if a substantial portion of those activitiesgenerate fees that would otherwise trigger bmker regissation~seq-a&. In providing this exception,Congress recognizedthat where banIcsconductsecurities tmmctions in their fiduciarycapacity, they are subject to an entirely separate scheme ofbank fiduciary regulation.

Nancy C. Morris Jennifer J. Johnson Mmh 26,2007 Page 6

W e we pleased that the Agencies' proposal has taken several steps to significantEyreduce the burdens and expensesassociated with compIying with the trust and fiduciary exception's "chiefly eompwted"rquirement Qfparticularnote is the fact that the; Agencies now propose in Rule 721to include feespermitted by Rule 12b-1 ofthe InvestmentCampanyAct and other typesof feespaid by investment comp*es and their =Nice providers within the meaning af feesbased an assets under management, and therefore permittedby GLBA, And while we c o n h e to questionwhether GLBA actually requires banks to calculate "chieflycomptmsated" on anacoount-by-account basis, we are pleased that the Agencies have providedwhat appearsto be a workabb bank-wide exemptionthat will not require brraks to perform an aceount-by-account analysis ofi€scompensation.

W e do have fie following comments to make with respect to the definitionalprovisions ofproposed K d e 721 andthe bank-wide exemptionrequirementsofproposed Rule 722.

A. Relatiomhip Compensation

It is our u u d m ~ d i n gthat, underpropsed ]Rule 721, included within the definition of "relatiomhipcompensatian"are the feesreceivedfiom investmentcompany mmpIexes for the types of serviceslisted in the proposedrule, whether such fees are paid by the investment

* company itself or by my of the investment company's service providers, such as its admmstmtorS primary distributor, investment adviser;or transfer agent. This interpretationis supportedby the n d v e portion ofthe release as well asthe t a t ofRule 721 itself Wew d d , however, recommend that the applicableprovisions ofprop& Rule 721be revised to cIarifythat the fees may be paid by an investment company or any such serviceprovider.

The definition ofrelatiomhip compensation should cover certainotherfaes as wen, if earned inaccounts forwhich the bank is relyingan the trust and fiduciary exception, such as fees earned in connectionwith securities lending activities, With respect to securitieslending activities,banks generallyshare,with their trust and fiduciary clients, the income earned on reinvestment afthe cas8]1coflated postedby the swwitiesbomwer as part of the lending compensation arrangement. Wenote that the tisf of fees qualifyingas " b e t sundermanagement'' is "thout limitation" and believe that theportion of the income or compcmtionemed on the cash collateral associatedwith.securitieslend'i transactions could properly be classified as am "assets dermanagemenf9fm foraccounts far which the bank is relying on the trust md fiduciaryexception.

W e also believe &at perfommce-bad feesshouldbe considered assets under managlerne11tfw. By measuringthe growth of assets under management during a givenperiod relativeto some standardbenchmark ormeasure of themarket, such asthe S&P 500 Index,these typesoffees ate,in essence another variatio~ufa fae imposed ion assetsllnder management. At no t h e does the number of transadom aEmt the feeand, in fact, the investmentscouldremain static throughout the year and still beat a standardmeaswe ofmarket performance.

Nancy C . Morris Jennifer J, Johnson March 26,2007 Page 7

Settlement fees are fees that maybe earned indirected trust accounts on trades placed with abroker-dealer by an outside investment manager, These fees areassessed for the administrative services necessary to settle the transaction, not to executetbe transaction which has alreadybeen performed by the braker-dealer. While these feesare frequently set as a flatper orderprocessing fee, they shouldbe distinguished h m the statutory Emitsplaced on flat per orderprocessing fees associated with aecuting securities ;itransactions. We believe that this f s shouldbe propaly c h a r a c e d asan a8miniskative fee. We would note that settlementfees arepermissible under the eustdal exception, as well asproposed order-takingexemption. We alsobelieve hat disbursement fees, wire transfafees andother d l a r types of fees should also be c~assifiedasadministrative fees, and,therefore, relatiomhip compensation.

B. Two-YearRollinn Averam

W e understand that calculation of "chiefly compensated," whether performed onan account-by-accaunt basis or an a bank-wide basis, requires averaging the percentagesobtained for each ofthe two immediatdy precedingyears. We further understandthat compliance with proposed Replation R will not be required until the h t fiscalyea.beginning after June 30, 2008and, thus, far tl.roseb i d whose fiscal year coincides with the calendar year, c8mpIiance will notbe:required mtil January 1,2009. Once compliance is required, only then will a bank be required to start collecting the requisite hta to perform the two-year tolling averagecalcdati011

This calculation should only be requiredto be performedonce a year, not on a rolling basis, and the yearly calculation would be performed within a reasonable h e after the relevant infomationnecessaryfar the calculation had bwome available. So that the requisite systems c mbe developed in a timely and least burdensome manner, we request confinnationofOUT

understanding.

W e request that the Agencies give flexibility.tobanking organizations ta calculate their relationship to total ampernsation ratios either ona bank-wide basis,as cumtly contemplated underproposed Rule 722, or on abank holding eclmpanybasis, An organizationthat has more than one banhing institutian subsidiarymaywish to pedorm thiscalculation onanenterprise-wide basis.

3. SAFEKEEPING AND CUSTODY EXCEPTION

GLBA ex~eptsfrom broker registrationvarious activities conductedby banks in connection with safekeepingand custody services long provided by banks aspart oftheir customarybanking activities- ProposedRuIe 760 would allow banksIsubjectto certain conditions, to accept orders for securities tmmmtians hcu&odialcustomers. W e continueto questionthe need for thisexemptionas Congress clearly contemplatedprovidingbanks, under GLBA, with the ability to e o n h e ta provide order-takingservices for custodial clients.

Nancy C, Morris Jennifer3. Jafinson M m b 26,2007 Page 8

We note that #e narrativeportion of the release makes quite clear that a bank that is engaged innon-ordertaking custodial services need not tely on ;the exemptition provided by proposed Rule 760,These services are excepted under the statute itself.

Theproposal distinguishesorder-taking sentices pvided toemployeebenefitplans and similar accounts from order-taking services provided asan a ~ c o d t i o nto all other dst~dial clients. More restrictive cmditiom attach to the latta.

A. Ern~loyeeBenefit Plans, Individual Retirement and Similar Accounts

Congress frequently revises the provisions ofthe Internal Revenue Code governingtax-favored savings accounts, Accordingly, we request that iiprovision allowing for new types of plans to be treated as employeeh e f i t plans under theIlebe added toRule 760. In addition, we suggestthat banks be abIe to provide order-Wng services for escrow, paying and disbursement agemy accounts and that the lessrestrictive conditionsof prepased Rule 760(a) attach to these a660mts.

Further, a bank providing custodia1 services toan affiliatesor non-affiliatedtrust company orbank trust d6gmtment shouldbe able to provide order-taking sewices to those institutionsunder the same wnditions asb& that serve as custodians;to emplap benefit plans md similar accounts. In both situations, a fiduciary is interposed between thebeneficial owner and the emtodial b e thereby reducing the need for the additional restrictians associated with accommoda~onorders. In thost=situafions, w h m abank serves as custodian.for a bank trust department or bust company, there is no need for the more restrictive conditions associated with accomcldationtmdes as it is the fiduciary mgmhation, not the individual investor, that is placing the order.

The employee cornperisation restrictionsdo not prohibit a bank employee k m receiving compensationthatrec~gnkesthe employee farhis efforts in sellingthe bank3 custodial services, aswell as bonuses and referrals permitted underpropwed Rules 700and 701. The exempion aIso properly recognizes that some banks function asnun-fiduciary and nan-custodiaI ai3rninietors and recordkeep fox employee benefit plans and provides for m exemption for these banks.

For all non-employeebenefit plan and tax-favored accounts, pmpossd Rule 760@) would exempt b r n broker registration any bank that accepts securi~esorders for custodial accounts only as an accomrnodatioato that czxstomes, subject to the restrictions discussedbelow*

The proposal would place restrictions on the fee5 banks could earn forproviding order-taking se:Nices. Appropriately, the bank fee restrictionsdo not restrict a bank from charging the

Nancy C. Morris Jennifer J. ~ ~ h n s o n March 26,21107 Page 9

client a fee for providing the order-takingservicethat varies based on the type ofsecurity pmhased or sold.

h addition, the proposal limits &e ability ofbanks toprovide investment advice or researchto, or make recommendations to, or solicit securitiestnmsactiom fmm theaccomc while allowing banks to cross-marklet investment management services, including sharing examples of investment researchprepared by the trust departmentfar trust and fiduciary customers. Moreover, providing custodial customers with marray ofinvffsfmef~ts,e,~r,mutual funds, fromwhich to choose h r nwould not constitute investment advice or recomdtiirsns-

C. Chrqhg-Broker Activities

GLBA"ssafekeeping md custody exception daes not apply if "thebank, in connection with such activities,acts in theUnited States as a can-yixkgbroker (as such tern, anddifferent fkrrmuSatic3nsthereof,are used in section 15(c)(3) of[the Exchange Act] and the d e s and regulations thereunder) for anybroker or dealer, unless such carryingbroker activities are engaged in with respect to government securities," Proposed Regu1alion R does not address the meaning af the term ''txmyhg broker'' for the purposes of thls provision. We reqwt that the Agencies mmmit in the Final Rule not to adopt or adhere to any separ&e orjoint interpretatian of CLBA's 'kcarryingbroker"provision, until and unless theyjointly issue notice, and provide an opportunifyto comment, on aproposedjoint interpretiiiion.

4. SECURITIES LENDING EXEMPTION

Proposed Rule 772 provides an exemption forseedties lending s e ~ c e swhen the bank is not also perfofMing custodial services for the customer. We would strongly encourage the Agencies to affjxmexplicitly in the final rule's preamble that the mquirments under the exemptition for securities lendingactivitie~conducted as agent in the nun-custodial context do not apply ta the securities lending activitiesof custodians.

5. BROKER-DEALER EXEmION

To qualie for the tt-ust and fiduciary and custody exemptions, GLBG requires trades condnetedunder these exemptions to be directed ta a registeredbroker-dealer for execution. However, because securities of mast mutual funds are neither traded on anatio~alsecurities exchange nor throaa the fkcilities ofa national securities association or an interdealer quotation system, Rule 775pemits these trade5 to be effected eitherthrough the National Securities Clearing Corporation's Mutual Fmd Services (NSCC) or directly through the mutual h d ' s transfer agent,provided that: (I) the shares are distributed by a registeredbroker-deder, and (2) the mIes charge is limited to what the broker-dealer could charge under applicable regulations.

Nancy C. M m i s J d f w J. Jolvlson March 26,2807 Page 10

We note that the purchase and sale of variable insuranceproducts, such as variable annuities, that are held in insurance companyseparate accounts isnlsonot accomplishedthrough registered brokerdealers and is o h acr~~mp1isheddirectly with the issuing insurance mmpmyY In such situations, it is the insurancecompany that maintains policy holder records, acting, in effect, as the transfer agent for the vd&le insurance products it issues, Alternatively, settlement may be a~complishedthug$ settlement services o E t d by NSCC to insum= companies. We recornend that the agenciesexpand the scope ofRule 735 to include viuiable insurance products,

6. MONEY MARMET MUTUAL FUPVDEXEMPTION

W e suppart theAgencies' pmposal tor exempt banks effecting transactions inmoney m&et mutual fundsfrombroker registration.

Thank p u again forproviding this opportwity to cnmment. While we have commented onparticular facets afthe proposal, we would like to reiterate that we are hlly supportive of the comment letter submitted by the ABNABASA. If you have questionsabout this comment letter, please fe l free to contact me.

4James S. Qller

G q TeKaIste Office of the Camptrollerof the Currency

Michael Carr~ll Federal ReserveBank ofCleveland

John J. Wixted, Jr. The PNC Financial Services Gmup, Inc.